Showtime in Detroit

As the industry breaks into a 'Medium Six,' plans to unveil 700 new cars this month

By

Paul Ingrassia

Updated Jan. 1, 2010 12:01 a.m. ET

Detroit in January isn't an exotic destination, with wind chills in the teens and snowplows scraping streets in their annual battle with winter. But more than 5,000 journalists, many from overseas, will flock there next week for the preview of the 103rd annual auto show.

When the North American International Auto Show opens Jan. 16 an expected 700,000 visitors will see more than 700 new cars on display, including more than 30 global debuts. They'll also see an industry transformed. The stakes at this year's auto show are enormous because the focus won't be only on the cars but also on the companies themselves.

Since last year's show, General Motors and Chrysler have gone in and out of bankruptcy. GM is mostly owned by the government, and Chrysler is being run by Fiat. Toyota has announced its first loss in nearly 60 years and the largest car recall ever.

Photos

Inside the Detroit Auto Show

Volkswagen introduces its New Concept Coupe hybrid at the Detroit Auto Show Associated Press

GM's once-venerable Pontiac, Saturn and Saab brands will be absent from this year's show. Pontiac and Saturn are dead, victims of downsizing that has slashed GM to four brands from eight. Only a flicker of hope remains for Saab. The efforts of two tiny European car companies to buy it have fallen through, although GM says it's open to further negotiations. China's Beijing Automotive, meanwhile, has bought engineering rights to a couple Saab models. Will they live on as Sino-Saabs?

In the wake of last year's upheaval, auto makers will be trying to show that they have not just new cars but also promising futures. It's a critical message because the next chapters in automotive history will be radically different from the past.

Car companies are getting hit with multiple simultaneous revolutions, the fallout from the GM and Chrysler bankruptcies being just one. Others include the fragile economic recoveries in major economies worldwide and the endemic weakness of the U.S. dollar, which makes all imported goods, including cars, more expensive. Excess global auto-manufacturing capacity remains an issue. New technologies are changing the vocabulary of automotive engineers from "pound feet of torque" to "lithium-ion battery" and "plug-in hybrid." Pass the tofu, please.

On top of all this comes new competition from auto makers in emerging countries, with China leading the way. Besides Beijing Automotive's deal for Saab assets, China's Geely Automobile is the leading candidate to buy Volvo from Ford.

Still another Chinese company, BYD Auto, will display its plug-in hybrid vehicles in Detroit. BYD has attracted investment from a guy named Warren Buffet. Meanwhile, India's Tata has purchased Jaguar and Land Rover, the unofficial brands of Britain's landed gentry.

As the aftershocks continue it's clear GM, Chrysler and Ford—the only Detroit car company to avoid bankruptcy—will be America's Big Three no more. America instead will have a Medium Six: GM, Ford, Toyota, Honda, Nissan and one more, perhaps Fiat-Chrysler or Volkswagen or Hyundai. Each of the six will have between 8% and 20% of the U.S. market. It's an industry structure that will mirror what Europe has had for decades.

For car buyers, this means more competition on everything from styling to technology. In the "Big Three" world, one company would have set the trend for others to follow. But in the "Medium Six" world, GM and Toyota are pushing hybrids while Nissan is taking a different road: developing all-electric cars that won't use gasoline at all.

Ford, meanwhile, is marketing its electronic technology, ranging from its "Sync" system that allows voice-activated audio controls to forward-looking radar that keeps your car a preset distance from the car in front. Gentlemen, start your iPhones.

The Tata Nano, being sold in India for $2,000, doesn't meet U.S safety regulations. But some car company could well launch a U.S. model that will sell for $10,000, half the average price of cars today—or even less.

It might be Korea's Hyundai, which has tapped the back-to-basics move in recession-wracked America and become the hottest car company on earth. Hyundai's offer a year ago to let buyers hand back their cars if they lost their jobs was a marketing coup, even though fewer than 100 cars were returned. The company's U.S. sales rose 7% last year while most others posted double-digit declines.

ENLARGE

On the floor of the Detroit auto show last year, a display of Chrysler Dodge vehicles.
Bloomberg News

A decade ago Hyundai was a near disaster. Its unlikely success since then shows that improved quality and nifty new models can improve a company's fortunes quickly. GM should take note.

For all the hype heaped on the Chevy Volt plug-in hybrid, GM's critical car at this year's show will be the new Chevrolet Cruze. It's powered by a conventional gasoline engine (rated up to 40 miles a gallon) and billed as a five-passenger compact, a segment led by the Honda Civic and Toyota Corolla. GM has had ho-hum compacts for years, most recently the harsh and noisy Chevy Cobalt. If the Cruze can boost GM's credibility in small cars, the company will take a giant step toward recovery.

Chrysler must halt a frightening sales plunge, down 38% last year. The company is pushing discounts, its only realistic short-term strategy because most of its cars are lackluster or dated. Chrysler's survival will depend on cars derived from Fiat models such as the 500, a cute high-mileage subcompact. While a prototype electric version might debut at the Detroit show, Chrysler's new Fiat-derived models actually won't be launched until 2011 and 2012. They'll be make-or-break cars.

Ford now has quality equal to Honda and Toyota, according to Consumer Reports. Ford's new subcompact Fiesta, engineered in Europe, will be displayed at the Detroit show, offering lines more stylish than the competing Toyota Yaris and Honda Fit. To promote the Fiesta, Ford gave early prototypes to people active on social networking sites such as Facebook, and asked them to chronicle their experiences.

Toyota, meanwhile, has inherited the mantle of "world's largest car company" from GM, along with that title's seemingly attendant ills. Besides last year's $4 billion loss, Toyota recently recalled 4 million cars to fix gas pedals that stick to the floor mats and send the cars accelerating out of control. Toyota's image, clearly, has taken a hit.

Now the company is reversing its recent breakneck expansion pace and refocusing on basics. Its leaders are worried (which is a good sign), but when the auto industry's tectonic plates settle Toyota likely will emerge a winner. So will Honda, which has come through the crisis with minimal damage. Honda's opening of a new assembly plant in Indiana in late 2008 had seemed ill-timed, but the recent rout of the U.S. dollar makes it look smart.

The most remarkable aspect of last year's bailouts and bankruptcies is how auto-industry neophytes cut through craziness that had existed for decades. GM didn't know its cash balance within half a billion dollars on any given day.

What's more, senior auto workers regularly invoked a practice called "inverse layoffs" to volunteer for the Jobs Bank, an industry program that paid laid-off workers 95% of their wages indefinitely. The Jobs Bank proved so attractive, for obvious reasons, that it upended the traditional practice of junior workers getting laid off first.

Dealing with inverse layoffs and other perversities fell to the 15 or so members of President Barack Obama's automotive task force, mostly young Wall Street types. They used "diligence" as a verb, as in: "We've got to diligence that business plan." (Translation: evaluate the plan and its assumptions.) Their work came to a climax on June 1, 2009, when General Motors filed for bankruptcy.

ENLARGE

Adapted from 'Crash Course: The American Automobile Industry's Road from Glory to Disaster,' to be published Tuesday by Random House. Copyright 2010 by Paul Ingrassia.

At 6 a.m. that day 36-year-old David Markowitz, a junior task-force member, boarded an Amtrak train in New York for Washington. Over the prior two months Mr. Markowitz and his colleagues had been "diligencing" thousands of GM documents. On June 1 he hadn't slept in three days and was exhausted. But he was invited to attend Mr. Obama's speech that day, and wasn't about to miss meeting the president.

At 6:03 a.m., a small army of lawyers began hauling documents into U.S. Bankruptcy Court in lower Manhattan. The main filing, at 7:57 a.m., stated that GM's $172 billion of liabilities overwhelmed its $82 billion of assets. And that the company's $59.5 billion in stock-market value in April 2000 had been wiped out.

"There are no realistic alternatives" to bankruptcy, the filing added. "There are no merger partners, acquirers or investors willing and able to acquire GM's business...The transaction [bankruptcy] is the only realistic alternative for the company to avoid liquidation..."

At 11:30, Mr. Markowitz was walking into the White House when he suddenly felt faint, his legs started to wobble and he realized he wasn't going to make it. His boss propped him up and walked him over to the White House doctor's office. It looked like he wouldn't meet the president after all.

Nine minutes before noon Mr. Obama began his speech with some good news. In the wee hours of the morning the bankruptcy court had approved Chrysler's restructuring plan; Chrysler had sped through bankruptcy court like a hot rod. "Keep in mind," Mr. Obama said, "many experts said that a quick, surgical bankruptcy was impossible. They were wrong."

He went on: "Earlier today, GM did what Chrysler has successfully done and filed for Chapter 11 bankruptcy with the support of its key stakeholders and the United States government.... Chrysler's extraordinary success reaffirms my confidence that GM will emerge from its bankruptcy process quickly, and as a stronger and more competitive company."

After he finished, Mr. Obama happened to walk down to his doctor's office to get a couple of Tylenol pills. Young Mr. Markowitz, still in a blur, sensed a sudden commotion around him, but he wasn't sure what was happening. A couple minutes later he found himself shaking hands, groggily, with the president of the United States. The handshake, though happenstance, was well deserved.

Shortly after Mr. Obama spoke, Fritz Henderson, then GM's CEO, convened a press conference in New York with contrition that would have shocked his predecessors from GM's glory years. "Give us another chance," he implored. "The GM that many of you knew, the GM that in fact had let too many of you down, is history."

General Motors had virtually invented the modern corporation—with professional managers, as opposed to family founders, presiding over decentralized operations that were governed by central financial control. It had pioneered modern marketing, public relations and the hierarchy of brands that made automobiles vehicles for social mobility as well as physical mobility. It had set standards for everything from style and design to corporate health-care plans.

Many Americans bristled at the bailout. It signaled an "America poised to transform into Euro-Flop Social-Marxism, as we juggle open-ended bankruptcy," said one letter-writer to the Patriot Ledger in Quincy, Mass.

Such sentiments were understandable from a bailout-weary nation, especially because of the contrast with Ford. After careening from one disastrous decision to another between 1999 and 2006, Ford had come to grips with its fundamental need to change. The company changed CEOs and is now shedding debt, dealers and brands without federal funding. Ford isn't home free, but its progress provides proof that GM and Chrysler could have avoided bankruptcy too with better leadership, and the willingness to act decisively before it was too late.

Right after entering bankruptcy, GM started airing a television commercial that pretty much said it all. "Let's be completely honest, no company wants to go through this," the commercial began. "There was a time when eight different brands made sense. Not any more. There was a time when our cost structure could compete world-wide. Not any more. Reinvention is the only way we can fix this." Those were the very same arguments that GM's critics had been making, and that the company had been denying, for years.

—Mr. Ingrassia, a former Dow Jones executive, won a Pulitzer Prize for his coverage of GM in 1993 for this newspaper.

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